1/9/2018 Morning Comments

Good Morning,


There has been a lot of commodity talk so far in 2018, and two stories from the Financial Times this morning caught my eye as interesting.  The first said the Australian government’s statistics office was forecasting the price of iron ore to fall 20% in 2018, which reflected lower expectations than some private estimates.  They see the price falling 20% in real terms to $51.50/MT at the end of 2018 vs. $64.30/MT at the end of 2017.  They cited growing supply from low-cost producers such as Australia and Brazil.  At the end of the article, they noted Chinese steel production was “sensitive to a range of economic, monetary, and environmental policies…”  The very next article from FT said Chinese steel production growth is expected to slow sharply in 2017 as state-mandated factory closures and policies to protect the environment kick in.  The world’s largest producer is expected to see growth of just 0.6% in 2018 vs. 5.7% growth through the first 11 months of 2017.  Global annual production is still expected to rise 2.1% vs. 5.4% Jan-Nov 2017.  Lots of interesting nuggets in the global commodity story this year, at least much more so it would appear than 2017.

No major changes to the South American weather outlook with dry weather expected in Argentina the rest of this week.  A front is expected to bring rains to Buenos Aires by the end of the week, and the rest of the growing region by the weekend, with totals in the 0.50-1.00” range.  These are fairly critical rains, which if missed would expand the dry area concerns.    Things will then be mostly quiet in Argy during the 6-10 day.  Temps are in the high 90’s this week ahead of the rains.  Still no concern areas for Brazil to speak of with fairly healthy tropical rains expected during the 1-5 and 6-10 day.  No major heat threats in Brazil as well.  Would be fair to characterize Brazilian growing weather to-date as near perfect.


Mixed to weaker markets this morning following a rather dismal session yesterday.  Worth noting was the surge in open interest on the weaker close, especially in corn, which saw a jump of 42,724 contracts on the session.  25,589 contracts went into the front-end March and 11,036 into the May, with the expectation being funds added to their fairly large net short.  Open interest in corn is now the largest since November 27th, which was just ahead of First Notice Day for December futures.  Soybean futures were also up by 13,992 contracts, while SRW wheat was up 2,033 contracts and HRW wheat was down 3,930 contracts.  Rather quietly, Chicago wheat is on pace for its fourth lower close in a row, mirroring the downtrend from 12/4-12/12 which saw seven lower closes in a row.  Chicago wheat should consolidate ahead of Friday’s winter wheat and Dec 1 stocks report, but it certainly feels as though the trade is positioning to be disappointed by one report or the other.  The trade has consistently overestimated winter wheat plantings on the January report, having come in above the USDA in 28 out of 33 years since 1984, and hitting the mark once back in 1996.  It feels as though analysts are determined to not have that happen again, which could set the stage for a bearish surprise on acreage if USDA doesn’t cut as much or leaves things unchanged.  Unchanged acreage would likely see the most recent rally given up, especially with US FOB prices carrying a premium to most origins in the latest slate of tenders.

Data yesterday included weekly export inspections which were a mixed bag but disappointing for wheat.  Wheat inspections totaled 8.6mbu, well below the 19.9mbu needed weekly, and the second week in a row which has missed the mark.  In fact, wheat inspections have missed the mark in 12 of the last 14 weeks.  The inspection deficit with last year is now up to -6.6%.  Corn inspections totaled 33.4mbu, below the 41.2mbu needed weekly, but the best inspections of the marketing year to-date.  Total shipments of 449.4mbu are now down 36.3% from a year ago with plenty of ground left to be made up.  Soybean inspections totaled 43.5mbu which continued the seasonal decline, but was still better than the 32.3mbu needed weekly.  Total soybean inspections of 1.086bbu are down 14.2% from a year ago.

Other data from last week which came out late Friday included November ethanol and DDGs exports.  Total November ethanol exports measured 107.1 million gallons which were the largest since July, but down from November ‘16’s 129.0 million gallons.  With just one month left in the calendar year, 2017 ethanol exports have totaled 1.193 billion gallons which is larger than any other full year total with one month remaining.  The growth in ethanol exports has been a much needed boost to ethanol growth, and is a much more likely candidate for continued growth than is higher blends in the domestic gasoline supply.  India was in for 15.4 million gallons which was the second largest monthly total since March.  Also encouraging to see Brazil bounce back with 28.1 million gallons of imports, the largest total since July as the added import taxes don’t seem to be having ill-effects just yet.  China continues to be a notable absentee after an incredibly strong 2016.  DDGs exports totaled 875,302MT which was down from last month’s 1.027MMT and last year’s 982,446MT, but solid in the grand scheme of things.  The 2017 annual total will likely come in below 2016, but should run close to 11.0MMT.  China continues to take paltry amounts, not having shown up in sizable force since the removal of some of their import taxes on US-DDGs.  With their increased demand for barley and sorghum, DDGs could see improved demand in 2018 as they attempt to whittle down their massive corn stockpiles.

Wheat news of note would include Egypt’s GASC tendering overnight for February 11-20 delivery.  Should be dominated by Russian offers, but where the prices fall relative to the last tender could be interesting.  Russian FOB offers have worked higher over the last week, with asking prices up $1-3/MT depending on the slot.  Getting Russian wheat offers closer to $200/MT FOB as opposed to the $190/MT FOB magnet they’ve been attached to for the last month will be key to global prices working higher.  Otherwise, the big news on the export sales report last week was Morocco canceling 90,000MT of US-HRW in a somewhat surprising manner.  This certainly helped precipitate the idea US wheat was overpriced and needed to work lower.  In a reversal of fortune, it looks likely Morocco will purchase 315,000MT of US-HRW for May delivery under the preferential tariff rules with delivery by May 31st.  Doesn’t mean US offers couldn’t stand to shed a few bucks, but encouraging to see nonetheless.  Elsewhere, there are growing concerns about the Australian sorghum crop after what was a promising start.  Excessive heat and dryness is trimming crop prospects, which should limit their export availability as the domestic feed program competes for bushels.  At the very least, it should strengthen Aussie feed wheat demand, which in turn could limit additional export offerings from the East Coast.  Somewhat of a zero sum game, and could support second half US-HRW demand into SEA.  Lastly, a good discussion last night on the amount of low protein Canadian wheat trying to find homes in the US, which is in turn keeping a lid on calendar spreads and low pro basis.  Canada is mopping up any and all 12.0-13.5% export demand, and the large supply of US 14.0-16.0% protein due to the drought has mills staying hand to mouth for high pro wheat.  Having said that, farmer and elevator offers have dried up as of late as evidenced by the small spot floor run of cars.  In order to get through spring planting and into new crop, there is likely to be another run on basis which should offer opportunities.


Bottom Line: Hurry up and wait for Friday.  Average trade estimates have begun hitting the wires, and will be adequately priced in before the end of the week.  Get the feeling we are setting ourselves up for a negative reaction Friday if winter wheat acres don’t come in below estimates, or if Dec 1 stocks come in above.  Even if USDA cuts corn or soybean production, it likely won’t be enough to turn things “bullish.”  Feed demand for both corn and wheat will be a wildcard as animal numbers are surging and margins are strong which could have seen more disappearance than analysts are giving credit for.


There will be no Morning Comments the next two days as we attend the National Sunflower Association Research Forum in Fargo, ND.


Good Luck Today.

Tregg Cronin

Market Analyst






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